FOCUS – How courting the wealthy of the First Republic led to a meltdown

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Lawrence Delevingne

March 27 (Reuters) – First Republic Bank FRC.N It became the epicenter of the regional bank crisis in the United States after wealthy customers that it had attracted for its rapid growth began to withdraw their deposits, leaving the bank in a slump.
Wall Street’s top bank led by JP Morgan Chase JPM.Nhave tried 1 week or more Raises funds after funding San Francisco-based First Republic $30 billion in deposits Followed by Failure Regional Lender Silicon Valley Bank SIVB.O and undersigned bank SBNY.O.
Despite their efforts, First Republic’s shares plummeted 90% in March, with banking analysts and industry experts saying the bank is constrained on how to revive its fortune.

For years, First Republic has attracted high net worth customers with preferential interest rates on mortgages and loans.this strategy too make it is more vulnerable from local lenders with less wealthy customers US deposit insurance only insures $250,000 per savings account. Morgan Stanley analysts estimate deposit outflows of nearly half of total deposits, according to a March 20 memo.banking was high Uninsured deposits representing 68% of assets.

First Republic’s loan balance and investment portfolio also fell in value as interest rates rose. impeding capital increase.analysts and investorspegging paper loss Between $9.4 billion and $13.5 billion.
“We won’t be able to achieve roughly the same level of growth,” said David Smith, banking analyst at Autonomous Research.
A First Republic spokesperson said the company’s bank and wealth managers are still opening accounts, making loans and executing transactions with the help of customers and the community.
“Our commitment to excellent customer service has not changed and we remain well positioned to manage our short-term deposit activity,” a spokesperson said.
In January’s investor presentation, First Republic boasted shareholder returns preparation 19.5% annually, more than double that of its peers. outlined the strategy to pursue wealthy customer said its median Single-family mortgage borrowers had access to $685,000 in cash, significantly more than the average American.
The bank was open about using preferential interest rates on loans to attract wealthy customers.

First Republic executive Robert Lee Thornton told investors on Nov. 9 that “we want a full deposit relationship to get the best relationship pricing.” Told. so soon. ”
In February, the First Republic loaned buyers of Manhattan condominiums $10 million over 30 years at an initial interest rate of 4.6%, according to New York City records. That compares to his 5.5% that Bank of America currently offers for jumbo mortgages in the same zip code. of that bank website. It’s also one to two points below the national average for 30-year jumbo mortgages last month. data From the Federal Reserve Bank of St. Louis.
First Republic was founded in 1985 by James “Jim” Herbert, son of an Ohio community banker. Merrill Lynch bought the bank in 2007, but First Republic went public again in 2010. to be Merrill’s new owner, Bank of America, sold it.
Facebook founder Mark Zuckerberg acquired a home in Palo Alto, California on a $5.95 million First Republic 30-year loan at interest rates starting at 1.05%. 2012 Bloomberg article.
Other clients include Instacart founder Apoorva Mehta, investor Chamath Palihapitiya and property developer Stephen M. Ross, according to the bank’s promotional materials.
A spokesman for a Ross affiliate said it remains committed to First Republic. Representatives for Zuckerberg, Mehta and Palihapitiya did not respond to requests for comment.

Randy Randleman, co-founder of Sumeru Equity Partners, told Reuters that the San Mateo, Calif.-based private equity firm’s line of credit will use competitive interest rates from banks to invest in growing technology companies. and make loans to employees to invest in Sumeru funds.
“They provide a very high level of service to companies like ours,” Randleman said, adding that he remains a loyal customer.
interest rate rise
The First Republic suffered paper losses last year when the Federal Reserve began sharply raising U.S. interest rates to fight inflation, while banks were still trying to beat rivals on pricing. began to accumulate.
Gross unrealized losses in the held-to-maturity investment portfolio, primarily government-guaranteed debt, inflated According to First Republic’s, it made $4.8 billion at the end of December, compared with just $53 million a year earlier. annual report.
Lower US for no government intervention interest, such losses must be realized by Buyer buying First Republic or bank sale Liabilities to increase liquidity.
First Republicannual report of Investors also warned investors that more than half of outstanding loans was It consists of single-family mortgages, especially jumbo loans that are difficult to off-road.

Patricia A. McCoy, Boston College Law School professor and former Treasury official, said: The First Republic will find it difficult to overcome The challenge of reviving old business models and regaining the trust of fled depositors.
“One of the reasons wealthy people were drawn to First Republic was because they were able to get large mortgages at bottom-end interest rates,” McCoy said. now the price is quite If higher, those bargain mortgages are far less valuable to potential buyers. “It’s putting a huge strain on banks.”
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(Reporting by Lawrence Delevingne in Boston; Editing by Megan Davis, Greg Loumeriotis, David Gregorio)
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https://www.nasdaq.com/articles/focus-how-first-republics-courtship-of-the-wealthy-led-to-meltdown FOCUS – How courting the wealthy of the First Republic led to a meltdown